Hunter Harrison, Mantle Ridge, CSX: What's next? Analysis by Tony Hatch

By Tony Hatch

Last week, the Wall Street Journal (WSJ) broke the remarkable — and, as far as I can tell, true — story that CSX Corp. was in settlement talks with E. Hunter Harrison (EHH) and Mantle Ridge LP and thus, one expected, close to a resolution. This, just a couple weeks after various news media reported that EHH was working on an agreement with Mantle Ridge's Paul Hilal to secure a senior management position at CSX.

Here's a summary of what I think is happening, what is likely to happen and what some of the corresponding issues will be along the way:

• This is not about consolidation, which I think (a) would be unlikely, given the stances of most of the related stakeholder groups and (b) is ill-advised, given poor benefit/cost ratio due to the likely penalties (access) and hidden costs involved. Mergers also involve shippers, labor, other railroads, politicians, communities, regulators, etc.

• Already over? There is only one stakeholder group in play here: CSX shareholders, present and future. Most in the financial community already thought that EHH would land at CSX, given his track record and the associated following he has on the Street; the WSJ has advanced that thesis. Many sell-side analysts already have published models with CSX sporting new post-EHH operating ratios (OR).

• The holdup may be about the number of board seats, as the WSJ suggested, and supporters have mentioned full board support as the reason for EHH’s more rapid success at CP than in his previous “victories” at Illinois Central and CN. There is more than one reason for the success comparisons — along with that factor (a) must be considered; (b) belief — there is tangible evidence of prior success; and, lest we forget, (c) timing and/or luck as CP at EHH-entry had an artificially high OR that was in the process of self-correcting (to a still higher than EHH-like number).

• CSX is — sorry, folks — different from the railroads in his past successes. This is a mixture of fact and opinion, to be sure, but there are structural differences that may not be insurmountable but at minimum should be considered:

1. It is an eastern U.S. railroad with much higher densities and shorter lengths of haul.

2. It is not “broken” — CSX has improved operations dramatically and made progress through strategic change with its planned "CSX of Tomorrow," which has also allowed them to both cut outright capex and still nurture the core network to an even greater degree (capex being important to me).

3. Its “failure” to reach the long-stated OR target of 65 percent is almost (but I suspect) entirely due to the loss of $2 billion in high margin coal business. This may at last provide the “teaching moment” that the OR is but one ratio by which a railway is judged, not the only one (return on invested capital, among others).

4. It is not poorly managed — not only is the plan (albeit not fully defined) exciting, but CSX has a dynamic new C-Level Team (CMO/CFO/COO). That being said, most railway people believe EHH to be the superior operator who can improve just about anything. In addition, CSX — unfortunately, like most of the railroads — provided fairly tepid “color” on the quarterly call, coming the day before The Big News.

5. It is also a different time. As with the secular decline in coal, the importance of increased service to merchandise and IM customers has never been more critical (and with a longer term threat of AV trucking down the road). CN has prospered in a “kindler/gentler” post-EHH environment; CP has been a huge success, of course, but in terms of marketing and customer relations, the jury is still out — after all, EHH retired there without having named a CMO! 

6. Plays well with others? There's also the historical antipathy of EHH to industry organizations such as the Railway Association of Canada, Association of American Railroads, CREATE, etc., in a time of extreme political complexity and national labor negotiations.

On the other hand, I believe that this, from EHH’s point of view — and I am speculating here — is about legacy: not of the man, but the idea — that Precision Railroading can work in different environments and times. And, as I have always said and written, one underestimates EHH at one’s own risk. For now, we’ll wait until the supposed deadline of Friday, Feb. 10.

Tony Hatch is an independent transportation analyst and consultant, and a program consultant for Progressive Railroading’s RailTrends® conference. Email him at abh18@mindspring.com.